before the
House Government Reform Subcommittee on
Government Management, Information & Technology

March 15, 2000

Chairman Horn, Congressman Turner, distinguished Subcommittee
members, thank you for inviting me to discuss our progress
in getting Medicare's financial house in order. I would
also like to thank the HHS Inspector General (IG) and General
Accounting Office (GAO) for their valuable assistance to
us in this effort.

The Clinton Administration has a zero tolerance policy
for health care fraud, waste, and abuse. In 1995, we launched
Operation Restore Trust, a ground-breaking anti-fraud project
aimed at coordinating federal, state, local and private
resources in targeted areas. The result is a record series
of investigations and convictions, as well as new management
tools to fight improper payments.

Since 1996, we have built on these efforts with findings
from the Chief Financial Officer's audits through a series
of aggressive actions to prevent improper payments and strengthen
our financial integrity. The audit findings and GAO reviews
serve as roadmaps directing us to needed improvements. We
are attacking financial management problems with the same
focus and energy that we used to meet our Year 2000 computer
challenge, and we intend to be as successful in this as
we were in Y2K.

We have seen tangible results from our efforts to address
audit findings each year. This year, for the first time,
the auditors are able to give us a clean opinion. And the
claims payment error rate is holding steady at about half
of what it was in 1996, even though this year's sample includes
more claims for problem areas such as home health and medical
equipment. These results show that our progress is not a
one-time phenomenon but something sustainable on which we
can build.

We are taking several new steps to further protect Medicare's
financial integrity and bring the claims payment error rate
down. Key among these are efforts to determine an error
rate for every contractor that pays these claims. This will
help us focus on specific problems in a far more targeted
way than we can with the national error rate, which is extrapolated
from claims for just 600 beneficiaries.

Another critical area includes efforts to help providers
document and file claims correctly. We will test new documentation
guidelines that should be easier for physicians to use.
We will expand outreach and education programs to help providers
file claims correctly. And we will contact all physicians,
home health providers, and medical equipment suppliers in
the Medicare program to address documentation problems and
explain how to avoid common errors.

We also can expect to see more impact from the many program
integrity efforts that we initiated this past year through
our comprehensive program integrity plan and other steps.

--We hired special contractors to focus
solely on preventing improper payments.
--We greatly strengthened contractor oversight through tighter
performance evaluation standards, national evaluation teams,
and mandatory corrective action plans.
--And we continue to seek contracting reform legislation
so we can use the same contracting rules as other government
agencies and expand the range of firms capable of serving
Medicare and protecting taxpayer dollars.

We are aggressively addressing financial management issues
identified by us, the IG, GAO, and accounting firms with
which we have contracted. Most of these issues have their
roots in the system established in the 1965 Medicare law,
whereby Medicare must contract with private health insurance
companies to process and pay claims. We have made significant
progress already. We have an ambitious array of further
actions planned or underway that are consistent with the
GAO report's recommendations. And we are developing a comprehensive
business plan to ensure successful implementation of these
efforts. I am determined that Medicare and its contractors
meet the same high standards of accounting required of major
private sector corporations.

Background

Medicare pays more than $200 billion to one million health
care providers for services provided to nearly 40 million
seniors and disabled Americans annually. The Government
Management Reform Act has required annual audits each year
since fiscal 1996, including review of a statistical sample
of Medicare claims. That year a 14 percent claims payment
error rate and several weaknesses in financial management
were identified. We have been working diligently to address
these issues ever since.

In response to the fiscal 1996 audit, we took several actions
to address the most serious problems first. We contracted
with Ernst & Young to help us clean up our accounts
payable. We funded an audit to address concerns about the
Social Security Administration process for withholding Supplemental
Medical Insurance Premiums.

We also initiated several other actions to address the
error rate that included:

--increasing the level of claims review
and the number of physician medical directors who lead claims
review activities for contractors;
--expanding the number and scope of computer "edits--that
identify improper claims before they are paid;
--developing stricter enrollment safeguards to keep illegitimate
providers from billing Medicare; and
--organizing a national fraud, waste, and abuse conference
and using lessons learned to begin developing a comprehensive
program integrity plan.

The fiscal 1997 audit verified our success in addressing
issues with our accounts payable and the Social Security
Administration. Also that year, the payment error rate dropped
to 11 percent.

Following the fiscal 1997 audit, we took action to clarify
our handling of cost reports and the Medicaid payables and
receivables to the auditors' satisfaction, and made progress
in the remaining areas of concern raised by the auditors.

We also:

--made further increases in the level of
claims reviews;
--began conducting site visits nationwide to ensure that
durable medical equipment providers were in fact, legitimate
businesses; and
--set stricter enrollment criteria to keep unscrupulous
medical equipment providers and home health agencies out
of the program.

Strengthening Contractor Oversight

Among the most important actions we took following the
fiscal 1997 audit were steps to substantially strengthen
oversight of the private insurance companies that, by law,
process Medicare claims and thus carry out critical financial
management functions. We consolidated responsibility for
contractor management by establishing the new position of
Deputy Director for Medicare Contractor Management. And
we created a Medicare Contractor Oversight Board to set
policy regarding contractor-related activities. These steps
are proving to be critical as we move forward to address
remaining issues.

The fiscal 1998 audit revealed more substantial results
from our actions. The payment error rate was down to 7.1
percent, and only one area - accounts receivable - kept
us from receiving a clean opinion.

In response to the fiscal 1998 audit, we hired independent
Certified Public Accounting firms to assist us in an extensive
analysis of accounts receivables that validated more than
80 percent of the outstanding debt. As a result, we identified
$2.6 billion in outstanding receivables, some as much as
10 years old, most of which should have been paid by other
insurers.

As required by the Debt Collection Improvement Act, we
will aggressively pursue this debt and, when appropriate,
refer cases to the Treasury Department for further collection
activity and litigation. In accordance with policy of the
federal Chief Financial Officers' Council, we are removing
these receivables from our financial statements so the statements
reflect accurate economic value.
We also removed about $300 million in debt that is as much
as 10 years old with no potential for collection from our
financial statements. Some of these debts exceed the statute
of limitations for collection.

Our accountants also identified $1.3 billion in adjustments
from the books of our claims processing contractors, and
these also were removed from our financial statements. We
are requiring these contractors to implement corrective
actions so they comply with generally accepted accounting
principles and prevent these types of errors from recurring.

Also in the past year we:

--implemented our comprehensive program
integrity plan, which details our overall strategy to reduce
waste, fraud and abuse;
--hired independent Certified Public Accounting firms to
analyze internal control systems at 25 of the largest and
highest-risk Medicare contractors, representing 80 percent
of Medicare fee-for-service payments;
--created standardized reporting and evaluation protocols
and used national review teams to evaluate contractors'
fraud and abuse efforts and other key functions;
--directed each contractor to implement corrective action
plans to ensure that they can track funds more accurately;
--notified the contractors of our intent to amend our contracts
with them to require details and time frames for correction
of each deficiency identified;
--hired our first-ever national contractor to ensure Medicare
does not pay claims that private insurance companies should
pay;
--initiated steps to develop an integrated general ledger
system to standardize the accounting systems used by all
contractors; and
--created and filled a new high-level management position
to coordinate the agency's business plans to further strengthen
financial controls.

Fiscal 1999 Results

Our Government Performance and Results Act goal for 1999
was an error rate of 9 percent. The new fiscal 1999 payment
error rate estimate is 7.9 percent, which is not a statistically
significant change from the fiscal 1998 error rate. Due
to the limited size and variance of the sample, the true
error rate could range from 5.4 to 10.6 percent. We are
committed to achieving our goal for 2002 of 5 percent.

The error rate plateau shows that our actions have achieved
sustainable improvement. And it is noteworthy that the rate
remained stable even though the fiscal 1999 sample included
more home health and durable medical equipment claims --
areas where problems have been more common.

The clean audit opinion reflects our success in improving
Medicare's financial systems to increase the efficiency
and accuracy of our financial statements in accordance with
standard accounting practices. This is an essential step
in assuring that Medicare's financial status is accurately
portrayed so that the most effective subsequent steps can
be taken toward sounder day-to-day financial management.
Several of these on-going reforms directly address contractor
issues.

Contractor-specific Error Rates

While the national error rate has helped us focus our efforts
on preventing improper payments, we need stronger tools
to uncover the real problem areas. Key to this effort is
our proposal to develop contractor-specific error rates.
For each contractor, we will conduct reviews for a statistically
valid sample of claims and determine whether the contractor
paid the claim accurately. The review will determine whether
health-care providers were underpaid or overpaid for the
sampled claims. The results will reflect not only the contractor's
performance, but also the billing practices of the health-care
providers in their region. Contractors will then develop
targeted corrective action plans to reduce payment errors
through provider education, claims review and other activities.

We will establish baselines and then track each contractor's
rate of improvement. The results will guide contractor's
plans to reduce errors much as the overall Medicare error
rate has guided our national improvement efforts. We will
begin this summer by determining error rates for the companies
that process nearly 50 million claims each year for medical
equipment and supplies for beneficiaries nationally, and
we plan to perform similar evaluations for all claims-processing
contractors.

Additional efforts focused on contractors include:

--Strengthening contractor oversight. The
President's Fiscal Year 2001 budget requests $48 million
for new positions at the contractors and HCFA to tighten
financial controls and ensure a swift, coordinated response
to waste, fraud, and abuse. The budget also includes a provision
for HCFA to competitively contract with a qualified entity
to audit and evaluate financial management systems.
--Issuing contractor report cards. We are working with the
IG to create report cards on each contractor's performance
against specific goals and criteria. Contractors that perform
poorly and fail to improve risk losing their Medicare business.
--Requiring corrective action plans. We have already requested
corrective action plans from contractors for problems identified
in the fiscal 1999 audit. We have developed written procedures
for requesting, tracing, and disseminating such corrective
action plans, including time frames for evaluating them.
Each contractor must include a detailed description of each
problem, specify details of actions and time frames to resolve
them, and submit quarterly reports on their progress. We
plan to hire a Certified Public Accounting firm to evaluate
how effective these corrective actions are. And, we will
include review of corrective action plan effectiveness in
our standardized Contractor Performance Evaluation process.
--Strengthening Regional Office coordination. We are consolidating
responsibility for contractor management among our 10 regional
offices by establishing four Consortium Contractor Management
Officers. They will be accountable for management of specific
contractors and oversee staff with primary responsibility
for contractor management.
--Seeking contracting reform. We continue to seek contracting
reform legislation to allow Medicare to use all firms capable
of processing claims and protecting program integrity. Existing
law requires Medicare to use only health insurance companies
to process claims, and allows some providers to choose their
claims processor. This has hampered our program integrity
efforts, as the commitment to these efforts has varied widely
among these contractors. And some of these insurance companies
themselves have been convicted of violating Medicare program
integrity. The IG and GAO have agreed that we need to create
an open marketplace so we do not have to rely on a steadily
shrinking pool of insurance companies and can bring Medicare
contracting in line with standard contracting procedures
used throughout the Federal government.

Financial Management

We are also taking several steps to address financial management
issues. These include:

--Developing an integrated financial management system.
We continue to work towards an integrated financial management
system to standardize the accounting systems used by all
contractors. The project, which will make it easier to coordinate
and reconcile data, is scheduled for completion by 2004,
pending the results of the assessment phase currently underway.
The President's Fiscal Year 2001 budget requests $7 million
to support this essential project.
--Consolidating accounting functions. We are consolidating
all accounting and CFO Act reporting functions in one organization.
And we are establishing a new division to concentrate on
internal controls and risk adjustment, and ensure that procedure
guidelines and accounting policies are written, designated,
and implemented.
--Assessing staff needs. We are engaged in an agency-wide
planning effort to assess staffing needs, including those
for financial management. We also will consult with outside
experts to help us develop staff skills in financial analysis
and other pattern analysis techniques that can help identify
potential problems. In the meantime, we have initiated a
short-term project to organize regional office staff currently
involved with contractor oversight in order to facilitate
better national coordination of efforts. And we are assessing
other resource needs for optimal contractor oversight.
--Improving guidance to contractors. We are developing a
financial management internal control manual with standards
for evaluating contractors' financial management performance.
We are working with an outside consultant who plans to seek
further input from contractors, and then create a database
that we can post on the Internet with all our financial
management guidance and instructions for contractors. We
expect this to be completed by September. In the meantime,
we will clarify for contractors our instructions for allocating
cash receipts between the two Medicare trust funds. We also
will update our manual of instructions for contractors on
a yearly basis to incorporate results from oversight and
evaluation efforts by us, the IG, and GAO.
--Developing comprehensive financial management plan. We
are developing a comprehensive financial management business
plan to identify the strategies that will achieve our objectives.
This is being led by our newly created position of Associate
Director for CFO Audits and Internal Controls, and should
be completed this summer.

Protecting Data

Protection of beneficiary data is one of our highest priorities.
We have made some progress in addressing audit findings
about systems security, and expect to make more substantial
progress now that we have met our Year 2000 information
systems requirements.

--We are moving aggressively to address
all audit findings concerning security vulnerabilities and
expect these problems to be resolved by October 1, 2000.
--We have established a Beneficiary Confidentiality Protection
Board to develop and enforce a comprehensive privacy policy
--We are developing a robust security architecture that
will provide a solid foundation for building security into
all of our systems development and maintenance activities,
both internally and at our contractors.
--We are assessing new technology for securing internet-based
transactions.
--We are providing security awareness training for all employees
and ensuring that there are security and contingency plans
for all of major systems and applications.
--We are working closely with other HHS components to develop
a department-wide strategy for implementing Presidential
Decision-Directive 63, which requires federal agencies to
take aggressive measures to protect critical information
infrastructure from cyber-terrorism.

Error Rate Reduction

To bring the payment error rate down further, we are:

--Ensuring proper payment. We will continue
to aggressively work to reduce the payment error rate to
below 5 percent by fiscal 2002 through our comprehensive
program integrity plan and other efforts. Although Medicare
pays virtually all claims correctly based on the information
submitted, improper payments occur for reasons such as insufficient
documentation, lack of medical necessity, and improper coding
by providers. The error rate does not measure fraud, but
can include improper payments related to fraudulent conduct.
--Focusing on inpatient care. Medicare's physician-led Peer
Review Organizations are working with hospitals to investigate,
correct, and prevent claims that are improperly coded, insufficiently
documented, or for unnecessary or uncovered services. Our
new contracts with them include strong financial incentives
for them to reduce improper payment rates for inpatient
care.
--Hiring special program integrity contractors. Using specific
contracting authority provided by HIPAA, we last year chose
13 companies, including financial management and technology
companies, as our first-ever contractors devoted to protecting
the Medicare Trust Fund. These contractors, who have health
care expertise, will help us tackle key tasks, including
audits, medical reviews, data analysis, site visits, and
provider education.
--Expanding the correct coding initiative. We will continue
to expand the correct coding initiative, which uses roughly
100,000 computer edits to identify improper claims before
Medicare pays them. Begun in 1994, the initiative prevents
more than $250 million in improper payments each year.

Working with Providers

We also are continuing efforts to help providers file and
document claims correctly. This is particularly important,
as the current audit shows that the error rate plateaued
largely due to a sharp increase in documentation problems
since last year. Missing or inadequate documentation accounted
for 41 percent of errors in the current audit, which is
more than double the rate of such problems found last year.

To help providers file claims properly, we are:

--Testing new documentation guidelines.
We will this year begin testing new guidelines for physicians
on how to document evaluation and management services, which
constitute the majority of Medicare claims. The guidelines
will help ensure Medicare pays claims correctly while minimizing
the paperwork burden for doctors.
--Expanding provider education. We will expand efforts to
help doctors, hospitals, and other providers learn how to
properly file and document claims. This includes innovative
computer courses on our web site on the proper filing and
documentation of claims, as well as satellite broadcasts
and other efforts.
--Contacting key providers. We will directly contact all
physicians, home health providers, and durable medical equipment
suppliers in the Medicare program to address documentation
problems and explain how to avoid common errors.
--Initiating Progressive Corrective Action. We are undertaking
a new initiative in which we will share more feedback with
providers, both on an individual and community level, about
how to correct and prevent the types of errors identified
in medical review of claims. We believe this can have a
substantial impact in reducing improper claims among the
vast majority of providers who make only honest errors.

CONCLUSION

Protecting program integrity and strengthening financial
management and contractor oversight are our top priorities
now that we have met our Year 2000 obligation. The findings
of this year's audit and the GAO report on financial management
will once again serve as a roadmap guiding us to further
improvements.

We look forward to working with Congress, our IG and GAO
colleagues, and our contractor and provider partners to
ensure that we meet our obligation to pay claims properly,
fight fraud, waste, and abuse, and responsibly manage Medicare
finances.